11th February, 2019
Commodities trading firm Louis Dreyfus expects faster switching between sugar and ethanol production in Brazil, with more flexible mills leading to “dramatic” price-driven shifts.
Doing business in any foreign country almost inevitably raises the question of risk. From payment terms and reliability to brand exposure and support, planning and caution is required. Before jumping head first into a deal, business should develop a clear and concise export financing plan, for which you must assess a number of issues.
Brazil's population is significantly larger than Australia or New Zealand. Rapid growth can place strain on productivity and inventory capacity within your business. Long shipping and customs clearance times in Brazil often leads to buyers requesting longer payment terms, which can also affect your working capital.
Brazil's political and business environment is solid and stable. Political risk insurance is not generally required for exporting to Brazil, however if you so desire BRAANZ can help to arrange it for you.
Your business may be dealing with new clients, distributors or agents in an economic context that is foreign to you. Take extra precautions and make contingency plans for complications, such as late payments and fluctuations in exchange rates. These should be addressed in your export financing plan.
BRAANZ is able to provide advice on methods to reduce these risks and complete financial checks on any business or individual you are planning on working with or selling to in Brazil.
Many businesses offer accounts to local clients with a history of good credit. This exposes your business to full credit risk until payment is made, probably an inherent part of your local market and one you feel comfortable with. Exporting to Brazil brings up similar issues.
The easiest way to overcome this is to request payment in advance, which removes the problem for your business and provides immediate access to the capital. Wire transfers to and from Brazilian banks are simple and efficient for this payment method.
Some local buyers will happily do this for the first few orders as you develop some history, requesting credit terms once a relationship has grown between you while others will have concerns about paying for a product they may not receive for up to 120 days and yet others may have similar concerns as yourself, exposing their business to the trust of another in a foreign country. The cost of credit in Brazil is particularly expensive in comparison to many western markets. eg. The Selic rate(Brazil's official interest rate) was 11.25% in May 2015, compared to 0.25% in the US. Obviously, market rates are higher than this but reflect this base. As such, many Brazilian businesses would rather pay more for a product with longer credit terms than less for one without any credit terms. You may also be competing with local or other international suppliers that offer credit terms.
A standard, commercial letter of credit is a document issued by a financial institution which provides an irrevocable payment undertaking. The letter of credit can also be source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are often used as a guarantee of payment for deals between a supplier in one country and a customer in another
A bank guarantee(or surety) is a promise by a bank (the guarantor) to assume responsibility for the payment obligation of an importer if that importer fails to make payment. If the guarantor(Bank) is required to pay due to the importers failure to do so, the bank will usually enforce subjugation, allowing them to "step into the shoes of" the importer and recover the cost of making payment or performing on the importer's behalf, even in the absence of an express agreement to that effect between the surety and the principal. This means that while your payment is guaranteed, failure to pay on the part of the importer may end up putting your product into the hands of the bank, to be sold at their discretion.
This is the riskiest payment option, as the risk falls entirely on the your business. Buyers and sellers will typically negotiate a payment deadline of 30 to 120 days or even longer, depending on the relationship and transaction. If you are considering this form of payment, you need to have a clear understanding of all economic and commercial risks involved.